Question

1.  Problem 11-15 (Risky Cash Flows)

eBook Risky Cash Flows The Bartram-Pulley Company (BPC) must decide between two mutually exclusive investment projects. Each project costs $5,250 and has an expected life of 3 years. Annual net cash flows from each project begin 1 year after the initial investment is made and have the following probability distributions: Project A Project B Probability Cash Flows Probability Cash Flows 0.2 $7,000 0.2 $        0   0.6 6,750 0.6 6,750 0.2 7,000 0.2 20,000 BPC has decided to evaluate the riskier project at an 11% rate and the less risky project at a 10% rate. What is the expected value of the annual cash flows from each project? Do not round intermediate calculations. Round your answers to the nearest dollar. Project A Project B Net cash flow $   $   What is the coefficient of variation (CV)? (Hint: σB=$6,521.89 and CVB=$0.81.) Do not round intermediate calculations. Round σ values to the nearest cent and CV values to two decimal places. σ CV Project A $   Project B $   What is the risk-adjusted NPV of each project? Do not round intermediate calculations. Round your answers to the nearest cent. Project A: $   Project B: $   If it were known that Project B is negatively correlated with other cash flows of the firm whereas Project A is positively correlated, how would this affect the decision? This would tend to reinforce the decision to -Select-accept reject Item 9 Project B. If Project B's cash flows were negatively correlated with gross domestic product (GDP), would that influence your assessment of its risk? -Select-Yes No

Answer 1

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